With equities rallying anew, advisors and investors may want to revisit mid-cap names with the SPDR S&P Mid-Cap 400 (MDY) and the lower cost SPDR Portfolio S&P 400 Mid-Cap (SPMD).
MDY, which tracks the S&P MidCap 400 Index and is one of the largest exchange traded funds in this category, is higher by 26% over the past 90 days, confirming mid caps have plenty to offer as recovery plays.
“Our analysis found something surprising: during periods of systemic risk since the mid-1990s, contrary to conventional wisdom, large caps did not fall the least as the market declined, and small caps did not lead the recoveries. Instead, mid caps fared the best during both phases,” said Matthew Bartolini, head of research for SPDR Americas, in a recent report.
Mid-cap companies are slightly more diversified than their small-cap peers, which allows many mid-sized companies to generate more consistent revenue and cash flow, along with providing more stable stock prices. Additionally, they are not so big that their size would slow down growth. Increased mergers and acquisitions activity could be just what mid-caps need to catch up to large- and small-cap stocks.
Mid Cap Stocks Have Enviable Record
During the Asian financial crisis in the late 1990s, the 2000 tech bubble bursting and the global financial crisis, “mid-cap stocks experienced smaller drawdowns than either large- or small-cap stocks and also took less time to recover,” notes Bartolini. “These findings run contrary to two common beliefs: that shares of the largest firms hold up the best in a downturn, due to their greater resources and more-mature business models; and that shares of more domestically oriented, nimble, “risk-on” small caps are the fastest to recover after the market turns up.”
The mid-cap category has also outperformed their larger peers, but with lower volatility than small caps. Moreover, the returns of mid-cap stocks have also beaten those of small-cap stocks during the trailing three-, five-, and 10-year periods, with lower volatility.
“In short, mid-sized firms may occupy a sweet spot, pairing much of the operational dexterity of small caps with much of the business maturity associated with large caps,” writes Bartolini. “Characteristics such as these might explain how mid-cap stocks managed to outperform shares of both larger and smaller firms during the last three systemic crises.”
Cost conscious investors should consider SPMD because its annual fee is a mere 0.05%, or $5 on a $10,000 investment.
For more on multi-asset strategies, please visit our Multi-Asset Channel.